In 2007, when the government awarded telecom licences at the prices paid for similar licences in a 2001 auction, it was argued that the exchequer had lost over $10 billion due to underselling. Following this, the government came out with a set of merger and acquisition (M&A) norms for operators as proposed by the communications and IT ministry and the Telecom Regulatory Authority of India. The new rules involved a three-year lock-in period to ensure that the new players did not indulge in M&A activity till they had fully rolled out their networks.
The idea was to prevent non-serious players eyeing quick profits from cashing in on their telecom licences and the associated spectrum. However, that there were enough loopholes in the norms is evident from the fact that all the new licensees, except Datacom, have encashed their licences by diluting a part of their stake.
A year later, a government committee ?? set up to resolve the controversy over allocation of airwaves or spectrum to telecom operators ?? is engaged in revising the M&A norms, since the current number of operators is more than what is viable. According to the committee, consolidation should be allowed on the grounds that, on the one hand, the new entrants have got too little spectrum to roll out an adequate network and, on the other, larger operators can meet their spectrum needs through consolidation. (Earlier, lack of spectrum was the key argument against bringing in new operators.)
The committee has stated that instead of a ban on the sale of equity, the government should modify the existing policies to allow larger operators to buy new entrants to satisfy their spectrum requirements. While suggesting several changes in the telecom M&A norms to allow consolidation, the committee has criticised the current policy, stating that it has led to market fragmentation by allowing about 15 operators per circle.
The committee has also suggested that all telecom operators should be allowed to buy and sell spectrum, for which a fee would have to be paid to the government. It has also recommended that the internationally accepted system of auctions for issuing additional airwaves to operators should be adopted in India.
Spectrum transfer fee
The committee is considering specifying a certain percentage of the deal value that will be given to the government as spectrum transfer fee in case of any M&A activity in the telecom space.
The committee is also considering the option of charging a portion of the market value of the spectrum held by the seller as spectrum transfer fee. The market value could be determined on the basis of a recent spectrum auction in the respective telecom circles or a comparable circle, or through extrapolation from past auctions. The fee would, thus, differ from circle to circle.
Earlier, the government had conceded that some new players could sell their spectrum or merge with another company, thus making huge profits without rolling out any network. A panel set up on the issue had stated that “such gains can be moderated by levying a spectrum transfer or merger charge on all such transactions. Allowing moderated gains is a small price to pay for moving to a market-based mechanism for spectrum allotment.” It had added that the market should be allowed to determine the optimum number of operators by facilitating spectrum transfers and mergers.
Licence renewal fee
According to the committee working on the allocation of spectrum, licence renewal fee is another potential source of revenue for the government. The committee has recommended that telecom companies should pay a fee equivalent to the market value of the spectrum held by them at the time of renewal. Most of the current telecom operators had got their licences in the early 1990s for a 20-year period, which means that the licences will be up for renewal in the next few years.
The committee has proposed three possible methods to determine the fee to be paid by the operators for renewing their licences. It has also recommended that if the company refuses to pay the renewal fee, the airwaves held by it should be auctioned by the government.
The panel’s recommendations are a sharp departure from the views expressed by both the Department of Telecommunications (DoT) and Telecom Regulatory Authority of India (TRAI). Last year, DoT had proposed that telecom operators should pay about Rs 8.25 billion for extending their licence tenure by 10 years. It was of the view that the government could gain an additional Rs 30 billion by extending the licences of the existing operators. However, TRAI opposed DoT’s proposal by wanting to make renewal automatic.
All in all, if the spectrum committee’s recommendations come through, it will clearly lead to more revenues for the exchequer apart from ensuring marketbased allotment of spectrum.
